China can’t afford to be complacent

Beijing will have been pleased with the latest data that shows a well-timed improvement in growth just as the Chinese Communist Party starts ushering in the next generation of leaders.

There’s been nothing but good economic news to coincide with the 18th National Congress of the Communist Party being held in the Chinese capital.

The weekend release of better than expected export numbers adds to the picture painted by other data, including industrial output and fixed asset investment, that China’s economy may be set to recover after seven consecutive quarters of slower growth.

For the party elite taking part in the first phase of the handover of power to the “fifth generation" of leaders, the drip feed of better than expected data may provide some succour about China’s growth prospects.

But it won’t relieve them of the need to grasp the nettle of reform and lay the foundation for the country’s long-term prosperity.

While outgoing President
Hu Jintao
outlined a vision of doubling the size of the economy and per capita incomes over the next decade in his speech last week, the future of China’s economy will be less dependent on the headline numbers measuring the quantity of growth and more related to the party’s ability to deliver a higher quality of economic growth.

And the talk of doubling the size of the economy may sound ambitious, but it equates to a pace of growth at about 7 per cent a year. That is well below the double-digit average rates of growth achieved over the past three decades since former paramount leader Deng Xiaoping pushed ahead with opening the Chinese economy.

But for anyone that has been to China and seen the growing wealth gap, the overbuilding and the lamentable destruction of the country’s environment, the commitment to a slower – albeit still impressive – pace of growth should be welcomed if the growth is more diversified and equitable and the spoils are not concentrated into the hands of the wealthy and politically well connected.

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While the party leaders talk about the need for change and acknowledge the unbalanced and unsustainable nature of the economy, any push to reform the system would mean challenging those vested interests that have benefited from country’s development model and exploited the lines of political patronage to enrich themselves.

The Communist Party’s legitimacy has been based on engineering strong growth, which in turn has delivered a material raising of living standards over the past 30 years.

China faces challenges to its short-term growth, especially given the uncertain outlook for the global economy because of the looming fiscal cliff in the US and the ongoing debt problems in Europe.

But it is restructuring the composition of growth that presents a longer-term challenge to the Communist Party’s credentials as a successful economic manager.

The incoming leadership team headed by likely president Xi Jinping needs to accelerate efforts to promote economic growth through China’s consumers and lessen the economy’s reliance on fixed asset investment.

The range of potential outcomes confronting the Chinese government has been canvassed in new research from Washington-based Peterson Institute for International Economics.

The institute’s analysis says China could produce 8 per cent growth between 2013 and 2021 if fixed asset investment gradually fell as a share of gross domestic product to about 40 per cent and was accompanied by consumption-promoting reforms, such as more spending on social welfare and healthcare.

However, its bearish scenario predicts average growth of only 5.1 per cent based on circumstances where there is a marked slowdown in fixed asset investment and that leads to slowdown in consumption growth (and assumes no consumption-promoting policies).

That range of outcomes highlight not only the risks but also the opportunities for China’s new leaders as they take the reins of power in the world’s second-largest economy.

Laying the foundation for future prosperity will require more boldness from the incoming leaders than that of their predecessors, who helped create many of the problems they must now confront.